Management as a Liberal Art Research Institute

On the Nexus Between Entrepreneurship and Innovation

Byron Ramirez, Ph.D.

PUBLISHED:

June 12, 2024

Entrepreneurs are motivated by the possibility that the products and services they deliver can add value to society. But they also are keenly aware that in order to operate sustainably, they need to generate profits. As a result, thriving entrepreneurs constantly re-evaluate their products or services, the market in which they compete, and the way they produce and distribute their offerings. Moreover, entrepreneurs understand that in order to survive the intense rivalry and competition they face in the marketplace, they must find ways to continually innovate. 


Entrepreneurs’ efforts to offer goods and services to the market often leads to innovation as entrepreneurs introduce new ways of doing things and engage in a process referred to as ‘creative destruction’. Joseph Schumpeter coined this term to describe the inherently disorderly process of change, where ideas, products, firms, and whole industries are displaced by new innovations. Schumpeter posited that entrepreneurs’ principal contribution to society is to advocate for change and disruption, and in doing so, they help advance society.  Schumpeter conceptually established the ‘entrepreneur as innovator’ as a key figure in driving economic development.


Schumpeter argued that innovation is a critical factor of economic change. He indicated that economic change orbits around innovation, entrepreneurial activities, and market power. Schumpeter asserted that innovation-originated market power could provide better results than price competition and the invisible hand. Additionally, he suggested that innovation often creates temporary monopolies, allowing anomalous profits that would soon be contested away by imitators and rivals. He explained that these temporary monopolies were needed to provide the incentive required for other firms to develop new products and processes. 


The entrepreneur introduces new things, processes, and business acumen in an effort to transform innovations into economic goods. And the entrepreneur is willing to bear the risk associated with introducing change. The innovative activities of entrepreneurs feed a creative ‘destruction process’ by causing constant disturbances to an economic system in equilibrium, thus creating opportunities for generating income and profits. Hence, entrepreneurship disrupts the stationary flow of the economic system, and in this manner initiates and sustains the process of economic development. In adjusting to a new equilibrium, other innovations are spun off, and more entrepreneurs enter the economic system, introducing new products and services, thereby fostering advancement.


In similar fashion, entrepreneurial firms engage in creative destruction and thus are able to capture a share of the market by replacing firms that have failed to produce valuable products and services. The creative destruction process incentivizes firms to develop new products, services, and processes; otherwise, they will not survive in the long run. Accordingly, entrepreneurship encompasses the market entry of new firms, but it also supports the development of innovative activities in existing firms that allow them to create continuing value in the marketplace. In this vein, innovation can be characterized as the development of a new product, service, or process as the firm embarks upon new combinations of the factors of production. 


Innovation is a complex, dynamic process that requires commitment, resources, and investment. Often times, firms will modify their existing business model, re-arranging the manner in how they develop a product or the way they deliver new product functionalities or services to their customers. Modifications to an existing organizational process, to an existing business model, or even to a service delivery method, are all examples of how innovation is harnessed towards the pursuit of greater effectiveness and efficiency.


Innovation can be characterized as the development of a new process or product (or service) that meets new requirements and/or existing market needs. Drucker tells us: “Innovation should be focused on a specific need that it satisfies, on a specific end result that it produces” (Drucker, 1985). Innovation allows for more effective products, processes, services, technologies, and ideas to be made readily available to markets, and society in general. As a result, innovation is used by the enterprise (firm) as a means of meeting the needs of consumers; as a tool for competing with other enterprises in an existing market; and as an instrument for entering into a new market. Hence, innovation conceptually increases the likelihood of the enterprise achieving economic efficiency in the short run, and may allow the enterprise to establish a more competitive long-run position. Nonetheless, the enterprise encounters internal constraints (e.g. cost of inputs) and external constraints (e.g. market competition) that make it challenging for it to subsist in a market. Moreover, diminishing marginal returns influence the production capability of the enterprise. Based on these basic premises, innovation can be considered essential for the long-term economic survival and success of enterprises across different sectors and industries. 


According to some scholars, innovation can help improve the long-term survival of a firm as it can enhance its product line / service line offering while enabling it to establish a competitive advantage over other firms (Antonelli, 2003; Lundvall, 2007; Porter, 1990; Schumpeter, 1936; Teece and Pisano, 1994). It is worth noting that the firm that chooses to innovate does so based primarily on the information that it has about preferences, wants and needs of consumers in its market.  In other words, the firm innovates because it recognizes the opportunity and value of meeting consumers’ needs and wants in the short-run and sees the innovation investment as a means to also help position itself effectively for the long run. Drucker reminds us that: “purposeful, systematic innovation begins with the analysis of the opportunities” (Drucker, 1985) And since the firm most often faces competition, innovation becomes an avenue through which the firm can differentiate its products from those of other competing firms. 


Innovation is the successful embodiment of a useful idea in the marketplace, where the idea can be commercialized. Innovation also allows the firm to re-configure resources more efficiently, and hence allows it to increase productivity, with the implication that this can help augment profit. Innovation has helped build companies and grow and develop industries. For instance, just two decades ago, organizations struggled managing the vast amount of information and data related to their ongoing customer interactions. Since 1999, Salesforce has revolutionized how organizations keep track of customer interactions and manage their sales data. Since its founding, Salesforce has developed multiple iterations of its products, leading to a sophisticated cloud-based enterprise software which supports customer relationship management (CRM). Salesforce’s innovative solutions include sales force automation, customer service and support, marketing automation, and digital commerce. Salesforce has enabled large organizations around the globe to automate their sales and marketing processes and to become increasingly efficient, while becoming effective managers of customer data and information. 


Innovation is not a linear process. Instead, innovation is a highly iterative process of re-considering many internal technical and operational factors, and external factors, with an ever-changing interpretation of how the firm might continue to develop and deliver products and services. The firm in which innovation is fostered must support the diverse iterations, interactions, and transactions needed to support innovation efforts. The entrepreneur, who does not mind the uncertainty and risk, is able to manage this dynamic process. 


Innovation that addresses a real market need or want delivers value to society. Yet, innovation requires that firms systematically analyze opportunities that are present. Hence, the entrepreneur and entrepreneurial firm must be able to develop the ability to observe and perceive the evolving needs of people. The entrepreneur must then focus on delivering a solution that meets a specific set of needs or wants. This implies that innovation must be purposeful. And it also requires that the entrepreneur is not only disciplined, but willing to invest in acquiring knowledge which can be applied productively. Both the entrepreneur and entrepreneurial firm must continually re-evaluate their products and services, analyze the market in which they compete, and re-consider the way they produce and distribute their products and services. By embracing innovation, they will advocate for change and disruption, and help advance society. 



References


Antonelli, C. (2003). The economics of innovation, new technologies and structural change: studies in global competition series. New York, NY: Routledge.


Drucker, P. (1985). Innovation and entrepreneurship: practice and principles. New York, NY: Harper Business.


Lundvall, B. Å. (2007). National innovation systems—analytical concept and development tool. Industry and innovation, 14(1), 95-119.


Porter, M. E. (1990). The Competitive advantage of nations: creating and sustaining superior performance. New York: Simon and Schuster Inc.


Schumpeter, J.A. (1936). The Theory of Economic Development, Second Edition. Cambridge: Harvard University press.


Teece, D., & Pisano, G. (1994). The dynamic capabilities of firms: an introduction. Industrial and corporate change, 3(3), 537-556.

The Future of Knowledge Work: What Drucker can teach us

By Karen Linkletter Ph.D. • November 19, 2024
Interview with Karen Linkletter at the 16th Global Peter Drucker Forum 2024  Video Interview

The Specifics of Management of the Knowledge Worker

By Ryan Lee • November 7, 2024
Nowhere is management theory demanded more than in managing the knowledge worker, and yet nowhere is management theory more inadequate in addressing a field’s issues than in knowledge work. This is the point Peter Drucker posited in his work Management Challenges for the 21st Century (1991), and to resolve it he came up with six factors that determine the productivity of the management worker. Among these, his final point that management workers “must be treated as an ‘asset’ rather than a ‘cost’” by any given organization is an important concept1. While it only gradually emerged within management theory over the century, it is crucial for any employer and any government to understand and apply if they are to retain a competitive advantage going into the future. Historically, management theory has been about improving the output of the worker through banal efficiency: how to increase the production of steel per head, how to increase the production of cars per hour, how to minimize deficient products, etc. In all these considerations, the worker is a disposable resource. When he is hired, he is set to a particular task that is typically repetitive and thus easily taught, and when he is not needed because of shortcomings in his work, company difficulties, or automation, he is laid off. Referred to as “dumb oxen”, workers were seen in management theory as machines to have productivity squeezed out of. The shift from a majority manufacturing to service-based economy during the first half of the twentieth century changed this dynamic to some extent. The American postwar economic boom introduced the office worker as a common source of employment. This trend continued throughout the conglomerate era of the 1960s and was helped by the decline of the American manufacturing industry in the 1970s. Now in a stage dominated by service and knowledge work, the American economy must approach management differently. The aforementioned cost-asset shift is a demonstration of why this is so, as Drucker’s emphasis on the knowledge worker’s autonomy means that they wield control, not only within their job but over who they should work for as well. This in addition to the high-capital nature of knowledge workers means that the old management theory approach to labor as disposable will backfire catastrophically for any company that tries it with their knowledge workers. It is also important to remember the demographic trends of the United States, and more so the world, in considering why the cost-asset shift is vital. For all of human history until some fifty years ago, population was considered to be in tandem with economic power, given larger populations yielded larger labor forces and consumer markets. Economic growth was thus also correlated with population growth, demonstrated by the historic development of Europe and the United States and the more recent examples of the developing world. Consequently, the worldwide decline in fertility rates, and the decline in population numbers in some developed countries, signals economic decline for the future. In the labor market, smaller populations mean fewer jobs that produce for and service fewer people. Although the knowledge worker has grown in proportion to the total labor market, these demographic declines will affect knowledge workers as well, meaning employers will have a vested interest in retaining their high-capital labor. To enforce this, the cost-asset shift will have to come into play. The wants and needs of the knowledge worker pose a unique challenge in the field of management. Autonomy, for the first time, can be regarded as a significant factor affecting all other aspects of this labor base. What good does a large salary provide a knowledge worker if they don’t feel that they are welcome at an institution? How would they perceive that their work is not being directed towards productive pursuits at their corporation, especially given the brain work and dedication given to it? Of course, the fruits of one’s labor has been a contentious issue in management ever since compensation and workers’ rights became a universal constant with the Industrial Revolution, but this is augmented by the knowledge worker’s particular method of generating value. Given that Drucker poses their largest asset and source of value as their own mind, they will intrinsically have a special attachment to their work almost as their brainchild. Incentivizing the knowledge worker is also only one part of this picture. Per Drucker, the knowledge worker’s labor does not follow the linear relationship between quantity invested and returned. The elaborate nature of knowledge work makes it heavily dependent upon synergy: the right combination of talent can grow an organization by leaps and bounds, while virtually incompatible teams or partnerships can render all potential talent useless. And the human capital cost of the knowledge worker, both in their parents and the state educating them and in cost to their employers, is astronomical compared to all previous kinds of labor. In conclusion, the needs and wants of the knowledge worker must be met adequately, especially in the field of management. Management must almost undergo a revolution to adapt to this novel challenge, for the knowledge worker is the future of economic productivity in the developed world. Those employers that successfully accommodate the demands of this class of talent will eventually reign over those that do not accept that this is the direction economic productivity is headed.  References Drucker, P. F. (1991) Management Challenges for the 21st Century. Harper Business.

The Wisdom and Continuing Relevance of Peter Drucker

By Michael Cortrite Ph.D. • November 7, 2024
What is wisdom? The dictionary says it is knowledge of what is true and right coupled with just judgment as to action. Jennifer Rowley reports that it is the “ability to act critically or practically in a given situation. It is based on ethical judgment related to an individual's belief system.” (Rowley 2006 p. 255). So, wisdom seems to be about deciding on or doing an action based on moral or ethical belief in helping other people. This clearly describes Peter Drucker and his often prescient ideas For the 100 th anniversary of Peter Drucker’s birth, Harvard Business Review dedicated its November 2009 magazine to Drucker. In one of the articles about Drucker by Rosabeth Moss Kanter (2009 p. 1), What Would Peter Say? Kanter posits that, Heeding Peter Drucker's wisdom might have helped us avoid—and will help us solve numerous challenges, from restoring trust in business to tackling climate change. He issued early warnings about excessive executive pay, the auto industry’s failure to adapt and innovate, competitive threats from emerging markets, and the perils of neglecting nonprofit organizations and other agents of societal reform. Meynhardt (2010) calls Drucker a towering figure in Twentieth Century management. He says no other writer has had such an impact. He is well-known to practitioners and scholars for his practical wisdom and common sense approach to management as a liberal art. Drucker believed that there is no how-to solution for management practice and education. Doing more of “this” and less of “that” and vice versa is not how Drucker suggests managers do their work. Rather, Drucker relies more on morality and the virtue of practical wisdom to solve problems related to organizations. The virtue that Drucker talks about cannot be taught. It must be experienced and self-developed over time. A good example of this is Drucker’s Management by Objectives (MBO). Drucker does not give technical advice on how to initiate MBO. Rather he wisdomizes his moral convictions that integrating personal needs for autonomy with the quest of submitting one’s efforts to a higher principle (helping people) ensures performance by converting objective needs into personal goals. (Meynhardt, 2010). Peter Drucker published thirty-eight articles in the Harvard Business Review (HBR) and seven times won the McKinsey Award presented annually to the author of the best article published during the previous year in HBR. No other person has won as many McKinsey awards as Drucker The former editor-in-chief of Harvard Business Review, Thomas A. Stewart, quotes Peter Drucker; “The few of us who talked of management forty years ago were considered more or less deranged.” Stewart says that this was essentially correct. Harvard Business Review's very mission is to improve management practice. Stewart says this mission is inconceivable without Drucker’s work. Drucker’s work in management planted ideas that are as fruitful today as they ever were. Stewart posits that each year, managers discover extraordinary and immediate relevance in articles and books that were written before they were born or even before their parents were born. Stewart (2016) tries to answer the questions: Why does Drucker’s work endure? and Why is Drucker still relevant? First, was Drucker’s talent for asking the right questions. He had an instinct for being able to not let the urgent drive out the important, for seeing the trees, not just the forest. This allowed him to calmly ask pertinent questions that encouraged clients to find the proper course to take. Secondly, Drucker was able to see whole organizations. Instead of focusing on small particular problems. Ducker had the ability to find the overarching problem as well. Stewart uses Drucker’s 1994 HBR article, The Theory of the Business to make this point. Many people were trying to analyze the problems of IBM and General Motors by looking for root causes and trying to fix the blame. Drucker, on the other hand, argued correctly that the theories and assumptions on which they had managed successfully for many years were outdated. This article is as relevant today as it was in 1994 because Drucker took the “big picture view.” And no one else has ever been so skillful at describing it. Thirdly, starting in 1934, Drucker spent two years at General Motors with the legendary Alfred P. Sloan, immersed in the workings of the automaker and learning the business from within. This allowed him to talk with authority, but he has always stayed “street smart and wise.” This mentoring helped give Drucker the gift of being able to reason inductively and deductively. He could infer a new principle or a theory from a set of data or being confronted with a particular problem; he could find the right principle to apply to solve it. Drucker’s first article published in HBR, Management Must Manage, challenged managers to learn their profession not in terms of prerogatives but in terms of their responsibilities, to assume the burden of leadership rather than the mantle of privilege. Many in the management/leadership field probably found Drucker to be “deranged,” but in 2024, this is important advice for leader (Stewart 2006). Just a few more of Drucker’s ideas that seemed well outside the mainstream when he proposed them but are standard practice today include: Managing Oneself, Privatization, Decentralization, Knowledge Workers, Management by Objectives, Charismatic Leadership Being Overrated, CEO Outsize Pay Packages, and Enthusiasm of the Work of the Salvation Army (Rees, 2014). Clearly, Drucker remains relevant! References: Kanter, R. 2009. What would Peter say? Harvard Business Review. November, 2009. Meynhardt, T. 2010. The practical wisdom of Peter Drucker: Roots in the Christian tradition. Journal of Management Development Vol. 29. No. 7/8. Rees, M. 2014 The wisdom of Peter Drucker. Wall Street Journal. Dec. 12, 2014. Rowley, J. 2006. Where is the knowledge that we have lost in knowledge? Journal of Documentation. Vol. 62, Iss. 2. 251-270. Stewart, T. 2006. Classic Drucker. Editor Thomas A. Stewart. Harvard Business School Publishing Corporation.
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